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Time-Varying Causality between Oil and Commodity Prices in the Presence of Structural Breaks and Nonlinearity

Author

Listed:
  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Gbeada Josiane Seu Epse Kean

    (Department of Economics, University of Pretoria)

  • Mpho Asnath Tsebe

    (Department of Economics, University of Pretoria)

  • Nthabiseng Tsoanamatsie

    (Department of Economics, University of Pretoria)

  • João Ricardo Sato

    (Center of Mathematics, Computation and Cognition, Universidade Federal do ABC,Brazil.)

Abstract

The recent commodity price boom has spurred interest to understand determinants of commodity price movements. This paper investigates the causal relationship between oil prices and the prices of 25 other commodities, which include both metals and agricultural products, in the presence of instability and nonlinearity. For this purpose, we make use of a long annual time series dataset spanning from 1900 to 2011, and analyze time-varying Granger causality test, since the inference drawn based on linear Granger causality tests could be invalid due to structural breaks and nonlinearity – which we show are present in the relationship between the variables of interest. We find that, under the case of time-varying causality there are fewer rejections of the null, than under the standard linear Granger causality test, thus highlighting the importance of accounting for instability and nonlinearity. Relying on the time-varying causality test, we observe stronger evidence of other commodity prices in predicting (in-sample) oil prices (15 cases) than the other way around (7 cases).

Suggested Citation

  • Rangan Gupta & Gbeada Josiane Seu Epse Kean & Mpho Asnath Tsebe & Nthabiseng Tsoanamatsie & João Ricardo Sato, 2014. "Time-Varying Causality between Oil and Commodity Prices in the Presence of Structural Breaks and Nonlinearity," Working Papers 201469, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201469
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    Citations

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    Cited by:

    1. Bahloul, Walid & Gupta, Rangan, 2018. "Impact of macroeconomic news surprises and uncertainty for major economies on returns and volatility of oil futures," International Economics, Elsevier, vol. 156(C), pages 247-253.
    2. Rafiq, Shuddhasattwa & Bloch, Harry, 2016. "Explaining commodity prices through asymmetric oil shocks: Evidence from nonlinear models," Resources Policy, Elsevier, vol. 50(C), pages 34-48.

    More about this item

    Keywords

    Oil prices; commodity prices; stability; causality; linear; time-varying;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • F2 - International Economics - - International Factor Movements and International Business
    • G00 - Financial Economics - - General - - - General

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